Treasury issues mutual capital discussion paper

The Treasury has published a discussion paper on how building societies access capital, detailing options for securing the industry’s long-term stability.

The paper includes includes improving corporate governance and looking at new funding and capital models.

Building societies have been historically well capitalised and coped with the economic conditions strongly. However, the new regulatory environment and increased market competition means reforms are needed in various areas to improve the resilience of the building society model.

The Treasury's suggestions include creating more resilient capital instruments, ranking as Core Tier 1 or Tier 1; modifying the existing capital instruments to make them more resilient under stress; increasing the Government's support of societies raising capital for stability and growth, including changes to legislation; and looking at whether foreign capital instruments should be adopted in the UK.

The Treasury is seeking views on its suggestions from investors, members, societies and other interested parties.

Paul Myners, financial services secretary to the Treasury, says: "Building societies have long been at the heart of financial services in the UK. The sector encourages a diverse financial system and offers a strong business model. The Government is keen to ensure that this remains the case in the long-term.

"I am confident that the range of options available to building societies will enable them to increase their resilience to stress and give the sector, as a whole, the capacity to grow.

"There is a need to consider whether the current capital instruments available to building societies are sufficient to ensure the long term stability and growth of the sector, as well as exploring the alternative options and what changes would be needed to introduce such instruments."

Adrian Coles, director-general of the Building Societies' Association, welcomed the paper.

He says: "The Treasury has summarised, with great clarity, the need within the mutual sector for a mutual compatible form of capital instrument that qualifies and meets the set of requirements coming out of Europe.

"The Treasury raises some interesting considerations on whether a new form of capital instrument could lead to institutional shareholders becoming entitled to a specific governance role at individual societies while ensuring that mutual values remain paramount, and how this would change the current mutual business model. We will be exploring these issues of principle when responding to the paper."